Settlement Agreements: everything you need to know
Many people will, at some point, come across a settlement agreement. You may perhaps have been offered one by your employer; or perhaps you are an employer considering offering one and wanting to know how best to approach it.
In either scenario Paladin can offer the best possible advice and assistance. Meanwhile, this article will give you a few key pointers.
What is a settlement agreement?
A settlement agreement – previously called a “compromise agreement” – is a contract between an employer and employee, under which the employee’s rights are waived on mutually-agreed terms. These terms generally provide for the employee waiving some or all rights he or she may have to bring claims against the employer, in return for something of benefit to the employee – usually money, but not necessarily. Most often they are used to settle or ‘compromise’ dismissals/terminations, but this is not always the case. Sometimes there is another specific issue which the employer wishes to resolve permanently – even if the employee is to continue in their employment.
When is a settlement agreement offered and what are the benefits?
It can be offered in a variety of situations. There may be a reorganisation going on, or a redundancy situation. There may be performance or disciplinary concerns, or perhaps a long-term sickness or other absence situation. There may be a dispute over pay or benefits. There may simply be a personality clash. Whatever the background, a settlement agreement can be useful both for the employer and the employee.
For the employer, if signed a settlement agreement offers them protection from future potential claims. The employee is precluded from bringing most claims against them after signature.
For the employee, a settlement agreement may be the best opportunity to receive agreeable terms, which can often be in excess of their legal entitlement.
For everyone a settlement agreement is often the most comprehensive, quick and commercially sensible way of resolving a potential dispute – or of achieving an amicable exit.
What do we do?
For the employer we can of course draft the settlement agreement. More importantly, we won’t just provide a bog-standard template document, we will provide our bespoke agreement – an agreement that offers you the protections that you need. We can advise on how to make the offer to the employee and what level the offer should be, taking full account of the background.
For the employee, in order for a settlement agreement to be binding you are required to obtain independent legal advice. This is so much more than just signing off the document (as some advisers will do). It is about providing you with comprehensive advice as to the terms of the agreement by explaining what they mean. It is also about advising you if the offer is appropriate and, where required, negotiating with your employer to increase the package being offered. A typical package may include not only a specific sum but also potentially an agreed reference, outplacement support or a variety of other terms.
How does the tax work?
In the absence of a termination, a payment will almost certainly be taxable as income. There are a number of laws around the tax treatment of termination payments though. We know exactly what these are and how to apply them for maximum effect. We will ensure that anything we draft is in line with the latest law and HMRC practice and we will advise on the tax treatment of any payments being made, including ensuring they are made in the most tax efficient way possible.
Who pays the legal fees?
Now that is a good question! The answer is usually that the employer will pay some or all of the legal fees – but they don’t have to. The amount offered by an employer varies quite considerably. We can advise on how much is appropriate to offer to pay. For an employee we can try and negotiate an increased contribution if necessary.
Taking things further
If you have any questions at all about a settlement agreement, give us a call today and we will be happy to help.
Speedy advice, getting you the deal you deserve?
That’s the Paladin way.